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Journal Article

Divisionalization, Franchising, and Divestiture Incentives in Oligopoly

Michael R. Baye, Keith J. Crocker and Jiandong Ju
The American Economic Review
Vol. 86, No. 1 (Mar., 1996), pp. 223-236
Stable URL: http://www.jstor.org/stable/2118264
Page Count: 14
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Divisionalization, Franchising, and Divestiture Incentives in Oligopoly
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Abstract

A two-stage game is used to model firms' strategic incentives to divide production among autonomous competing units through divisionalization, franchising, or divestiture. Firms simultaneously choose their number of competing units, which then engage in Cournot competition. While it is costly to form autonomous units, each firm does so in equilibrium, thus reducing firm profits and increasing social welfare relative to the case where firms cannot form competing units. With linear demand and costs, duopolists choose the socially optimal number of competing units; oligopolies with larger numbers of firms choose too many. The case of nonlinear demand is also examined.

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